In forex trading, in addition to finding the correct entry point, money management is also an important factor in determining investors’ profits. There are many ways to manage Forex and Fixed Time Trade money that investors can apply to build their own strategy. In this article, I will help you understand why you need to manage money and what effective methods of money management are. Now let’s dive into the article!
What is money management? The importance of money management
To trade successfully in Olymp Trade requires patience, the right mindset, quick adaptation to market changes, and other qualities. Like every profession in trading, you need to have a specific plan to make profits.
Money management is considered an extremely important part of the strategy. A complete trading plan will tell you when to enter and when to exit. Then money management is a factor to help you survive in the forex market.
What is capital?
The main source of capital is money. Specifically, it is the source of money you intend to invest in the Olymp Trade platform for trading. With a pre-calculated budget level, traders will be provided with a scope to assess their viability in investment strategies. Capital not only helps to expose the risk and uncertainty of different strategies, but it also helps the trader to effectively check investments for loss or gain.
Capital management is effective to control money expenditures. From there, you can make the most optimal trading decisions for a long-term investment plan.
The money management experience that you need to know
- Always predetermine how much you can lose
- Avoid over-trading
- Admit you are wrong by cutting your losses and stop trading when you reach the maximum allowed losses per day.
- Rest after winning or losing streak
- Respect and understand leverage when trading Forex
Popular money management methods in Olymp Trade
Each trader will have a different method of managing money in his or her trading. It depends on a lot of other factors involved such as trading system, risk appetite, profit expectations, financial situation, trading time… All of the above issues influence the decision of choosing a money management method suitable for each person. Here are some popular methods today.
Average Up is known as a strategy of entering additional positions on a winning streak. Just to be clear, once your first order is profitable, you will add an order to make the account
The potential loss will be quite small because the first order is already profitable. If the second order loses, the loss amount is not large.
Averaging Up will grow the account very fast. The longer the trend, the higher the profit.
It is difficult to find an optimal and reasonable entry point for the next trade. Moreover, when the price reverses, the profit turns into a loss quite quickly if we open many orders. So you should invest in the first order with a large volume. And decrease the volume of the following orders gradually.
This way of managing money is suitable for trend trading strategies. As the trend goes further, reduce the trading volume gradually.
Average Down is currently very controversial in the trading community. It is easy to apply but very dangerous if you do not know how to control it. It is the opposite of Average Up because you will enter more positions when the price moves against your expected direction.
For example, you entered a buy order but the price goes down. You think it will go up so you buy more at a lower level. When It goes down again, you continue to buy at this lower level. Finally, when the price goes up, you win a lot.
As mentioned above, you can win big after a reversal when the price moves in the direction you expect.
Even if the price doesn’t return to the original breakeven point, the later orders still can save the previous ones when the price pulls back to the original direction a little.
This method is often abused, especially by new traders. Investors love to use the Average Down, only to get a bad ending. When losing money, new traders always want to recover the losses when expecting the market to rise again. They enter more orders and lose all.
Average Down method isn’t bad but it’s not for newbies. This method should only be used in Forex trading in Olymp Trade.
Martingale betting system
I believe that everyone knows the concept of Martingale betting system and how to use it. This is a method of money management that is discussed in all forums. Its risk is too great for the profit received. Traders need to be conscious when using it and facing a long losing streak.
After a loss, traders who use Martingale will increase the trading volume to both covers the previous loss and take some profits. If the 2nd order also loses, there will be a 3rd order with a volume so that when winning will cover the loss of the 1st and 2nd losing order plus a little profit, and so on until there is one profitable order.
All loss orders will be solved by only 1 profitable order.
Is your account big enough to enter consecutive orders and each order is getting bigger and bigger? This is a matter of risk. In the long term, all traders will experience a series of losses and you cannot avoid burning your account when you incorrectly predict an order with too larrge volume. This method is often applied when trading Fixed Time Trade.
Anti-Martingale money management method
Anti-Martingale eliminates the risk in pure Martingale. Contrary to the usual Martingale, when losing, traders can’t double their volume. But when earning the profit continuously, they will double the volume for the next trade. The thinking behind this method is that after every win, we get free money (profit) which takes the pressure off a bit.
Traders can win a lot if they encounter a continuous series of profits.
Only one loss wipes out all previous gains. To improve this limitation, traders should only use half of the profit gained, not double. At least we can still have some profits left after a loss.
Fixed Ratio (Classic)
This method is a way of entering orders with the same volume. You need to determine how much you are willing to risk on a trading day. Then divide that amount by the maximum number of trading orders in the day to get the amount of each order.
For example, you risk $100 and accept to lose 5 trades in a row. So each order you will put the corresponding amount of 20$/order.
Advantage of the method: You do not need to calculate or change the order amount. The account will be difficult to “evaporate” because the order amount is fixed and within the allowed range.
Cons of the method: You need to have a trading strategy that has a winning rate of over 60%.
Above are some effective money management methods in Forex and Fixed Time Trade. But regardless of the method, to be successful, traders must prepare themselves for a stable psychological ability. From there, you can come up with the most appropriate strategies depending on the circumstances, effectively helping the process of building your investment career.
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